ICB: maintaining momentum

13 December 2013 15:04[Source: ICB]

Clouds are slowly clearing after years of economic gloom in Europe, but producers still face tough business conditions. How can they maintain growth momentum as they grapple with sluggish markets? A recent ICIS/Booz & Company Roundtable discussed the possibilities

Copyright: Rex Features

The economy may be showing signs of improvement but the rate of recovery since 2011 has fallen below expectations. Europe’s chemical sector remains sluggish, requiring producers to embark on a programme of cost controls, rationalisation and restructuring to remain competitive and resist the advances of players from other regions.

A brief resurgence was seen in 2009-2010 thanks to inventory rebuilding, extensive government stimulus measures and an increase in exports. But the subsequent 10% rise in production output in 2010 proved only a temporary reprieve and European chemical output has seen further declines since.

Navigating these tough economic conditions fuel-led the discussions at the fifth ICIS/Booz & Company CEO Roundtable on European Chemicals, held in Brussels, Belgium, in late October. Participants offered their insights on the theme of the event, “How to maintain momentum while managing for the short term in today’s difficult economic and market conditions”.

Industry participants, from both the specialties and commodities sectors, agreed that the picture remains mixed for the chemical sector in Europe. Although petrochemical production had risen in July for the third consecutive month, polymers production fell. And while basic organics and specialty chemicals were up, consumer chemicals suffered a decline.

The industry has reacted by controlling and cutting costs to improve its operational effectiveness. Improving efficiency and investing in innovation is critical at the bottom of the cycle, as is reassessing global market and investment strategies.

Commodities have been struggling in 2012-2013, and many players have opted to rationalise their European production base. However, participants noted that key end use markets have been starting to show signs of recovery.

The beleaguered automotive sector is seeing some upturn in the UK, where output is expected to be over 1m for first time in years, for example, while the housing and construction sector has been boosted by government stimulus programmes. EU/US trade deals are also on the way, which could stimulate activity – and although subdued, interest is increasing in chemical mergers and acquisitions (M&A).

Meanwhile, there has also been some significant investment this past year and, given the shift towards lighter cracking, there is a clear emphasis towards raising butadiene (BD) and C4 capacities. Notably, BASF, LyondellBasell, MOL, OMV and Versalis have all been investing in BD production.

Carl Van Camp, senior vice president polymers, Total, commented: “If you look at the margins that the crackers have been generating these last few years, it’s very much supported by butadiene and led by benzene. Today, butadiene has gone to zero, and that means that a lot of the cracker added-value has to come from aromatics, and ethylene and propylene – and that is not good news.”

He observed that the continued slowdown in polymers demand has now spanned the past five to six years. Based on Eurostat figures, and taking 2005 as the base year, he pointed to a retail market that was still suffering, proving bad news for plastics use in packaging. Industrial production, meanwhile, has also dramatically fallen and is only now showing slight improvement, construction has slumped while the automotive segment continued to flounder.

“The drivers behind the polymers market are all still negative,” he said. “The most optimistic view is that they are stabilising.”

Just Jansz, director of consultancy, EBB, and board member at Synthomer and Genomatica, added: “If you look at Europe and polymers, I agree with the slow growth perspective and think demographics play a role in that. The big question people are struggling with is to what extent this is cyclical or at least partially structural. Some analysts point to the Baby Boom generation retiring and fewer people in the ‘high spend’ age bracket 25-55. You can also observe clear global shifts driven by high-growth markets in Asia, notably China, and the availability of low-cost feedstocks.

“There is no single magic solution to the challenges Europe is facing. There are many dimensions to this,” he said, “and smart solutions will have to take into account specific local limitations and opportunities.”

Patrick Pouyanné, president for refining and chemicals at Total, agreed the outlook for the medium or longer term for European polymers was not attractive. European players are manufacturing polyolefins from naphtha at $1,500/tonne while Middle East and US producers achieve less than $1,000/tonne – the question is where will the price for polymer go in Europe?

Pouyanné added that perhaps 20-30% of European polymers output was in the more attractive specialty grades, but that producers still needed to make 70% commodity grades in their plants, “and these are uncompetitive – it’s a real dilemma for us.” The only answer to drive costs down, he posited, was feedstock flexibility and to reduce reliance on naphtha cracking.

Jansz also pointed to the age of Europe’s assets, placing the region at an even greater disadvantage moving forward; more than half of Europe’s polyethylene (PE) and polypropylene (PP) assets are over 20 years old, and many are small and inefficient, he said. “I think the European industry really missed an opportunity during the good years to revitalise these assets,” he said. “Only a few companies have really done that and at the moment we do not have the reinvestment economics to do it. But if you look back at 2004-2007, you could have made a case that this was a good time.

“The asset base does represent a real problem but I think we can learn something from Asia; a lot of the intrinsic disadvantages in Europe are similar in Asia – the high energy costs, expensive feedstocks and so on – but it’s something that Asia’s been much better at coping with than Europe.”

“The one big trend we see in the specialty chemical industry is that companies are struggling with growing in a value sense. The chemical industry needs to become more customer-centric to better understand and deliver what their customers are willing to pay for. This requires clearer differentiated offerings through tailored business models.”

Fundamentally, Europe’s chemical industry is well positioned to achieve success, he said, but it needs to invest in capabilities for value creation beyond chemicals, which implies a transformation in skills and talent and revamping of its innovation in a more global and open approach.

Wolfgang Wienand, chief strategy officer at custom manufacturer Siegfried, said that the pharmaceutical industry had been suffering at the hands of governments less willing to spend on national health systems and quite a number of blockbusters having gone off-patent in recent years. Subsequently, greater cost pressure was pushing more pharma customers towards streamlining their asset base and outsourcing to external partners.

Besides this underlying positive trend for custom manufacturers like Siegfried, innovation is a key growth driver for the whole pharmaceutical industry. “The number of new molecular entities being approved is increasing again and hit a long-time peak in 2012 after some years of depression in the late 2000s,” said Wienand. “It’s interesting because the productivity of innovation seems to go through cycles of 10-15 years, from optimism to depression and back again.”

Transportation costs, feedstock volatility and rising energy prices usually have a limited impact on the high-value pharmaceutical products which is why the field of custom manufacturing is less a regional play but a truly global competition. At the same time, competition in this field is certainly increasing, Wienand said, with players in emerging markets moving downstream from intermediates and active pharmaceutical ingredients to finished dosage forms, raising investment and building up capacities.

“In the end we need to offer attractive alternatives to in-house production of pharmaceutical companies, so cost efficiency based on process innovation and a competitive asset base plus reliable supply chains are of critical importance”, he added.

Looking longer term, industry participants agreed that it was the shift in the feedstock balance that was perhaps causing greatest concern among their peers. The shale gas revolution in the US is driving petrochemical investment in the region and raising some eyebrows in the Middle East and in Latin America.

The main concern is the destination for all the polyethylene resulting from the extra ethylene produced. The wave of new capacity from the proposed crackers and expansion projects in the US could amount to around 10m tonnes/year – a 30% increase – through 2020.

It is unlikely that most could be absorbed domestically but lower imports and increased exports are anticipated. With the Middle East making moves downstream, Asian chemical growth still relatively depressed, Latin American markets lacklustre and the EU still reeling from its fiscal problems, the extra material could have significant ­repercussions.

“The anticipated huge increase in cracker capacity in North America and the related increase in exports of derivative products, in particular PE, has impacted planning in other regions,” said Jansz. “Many projects in South America have been put on hold or are being reconsidered.”

“The first target will be South America, which is very short of PE,” added Van Camp. “The Brazilian government has already announced that it wants more local production but apart from Comperj, there is not much new capacity coming onstream. So we can expect a lot of American product will go to South America – maybe 3m-4m tonnes. The question then is whether the rest will go to Europe or China – and that is of course a matter of cost.”

A lot will depend on polymer growth rates and capacity additions based, amongst others, on coal-to-chemicals technology in China. If demand growth does hold up at levels of 9%/year, as predicted by the US ACC for chemicals overall in the country in 2014-2016, then there may not be such a huge problem in Europe, said Van Camp hopefully.

SHORT-TERM STRATEGIES ARE AVAILABLE - BoozAre there any short-term measures companies can take to maintain momentum in these difficult economic times?, asked Richard Verity of Booz & Company. The answer, based on extensive research amongst major players carried out by Booz, is most definitely yes.

Enhancing performance in the short term, he explained, is in large part based around responsiveness to the market and customers’ needs. “Those companies that are responsive do better than those who aren’t.”

The key, he added, is understanding the customer and designing ­appropriate segmentation strategies.

The research carried out by questionnaire and face-to-face interviews showed that some companies do perform better than others financially and that this correlates closely to two factors: the variety of products and services they offer to the market and how they manage the cost of complexity as the number of products increases. At some point, explained Verity, extra business from increasing variety is overwhelmed by the extra cost of complexity.

The key to better performance in the short term, he noted, is to extend the benefit from increasing variety and reduce the cost of complexity. Companies that are doing this and thus driving revenue, margin and share value, are getting it right in three key areas: they use a need-based segmentation of their customers, with value-based pricing driven by this segmentation; they regularly calculate the EBIT (earnings before interest and tax) derived from each of their ­customers; and they use a number of differentiated ­supply-chain options designed to service specific customer segments efficiently.

The key to the segmentation process, added Verity, is not to focus on criteria that everyone has to meet to win the business (ie, “order-qualifying criteria” such as price, delivery and reliability, and safety), but on the criteria that actually win you the order – “This is how you can differentiate yourself to your customer.” The best performers will then design a tailored supply chain for each segmentation level, with different supply chain ­policies, service levels and inventories.

By aggressively using these approaches to market responsiveness, said Verity, companies can react quickly in the short term to maintain and even increase business ­margins.

TAKING PART IN THE ROUNDTABLE

Just Jansz, director, EBB, and board member Synthomer and Genomatica

Patrick Pouyanné, president refining & chemicals, member of the executive committee, Total

Carl Van Camp, senior vice president polymers, Total

Wolfgang Wienand, chief strategy officer, Siegfried

Richard Verity, vice president, ­chemicals & energy, Booz & Company

Matthias Baeumler, vice president, chemicals, Booz & Company

John Baker, global editor, custom ­publishing, ICIS

Andy Brice, custom publishing editor, ICIS

Author: John Baker Andy Brice

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial
to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free
trial to ICIS Chemical Business.